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Estimating Cost of Delay

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Estimating Cost of Delay

  1. 1. Estimating Cost of Delay Sydney Limited WIP Society http://www.meetup.com/The-Sydney-Limited-WIP-Society/ Jason Yip @jchyip j.c.yip@computer.org http://jchyip.blogspot.com
  2. 2. “Speed is not the objective, it is a means to an end; the objective is making money.”
  3. 3. Think of “money” as a proxy for what you define as value
  4. 4. Split up into teams (5 min) • Introduce yourselves • Choose a “new” product idea including a rough idea of what it’s worth
  5. 5. Simple Test (5 min) • Each member of your team, separately write down your answer: • What is the cost of delaying the project 3 months?
  6. 6. What is the range of of the answers? • What do you think the range would be in your real-life teams?
  7. 7. 4 key objectives
  8. 8. Economic modeling process
  9. 9. Develop Baseline Model
  10. 10. Considerations for the baseline model • Pricing Trend • Market Size x Market Share = Unit Sales • Unit Sales x Unit Price = Dollar Sales • Unit Cost Trend • Project Operating Expenses: Development, Marketing (% of Sales), General & Administration (% of Sales) • (Cumulative) Profit Before Tax
  11. 11. Copy and modify from the business plan!
  12. 12. Ask for help from the Finance department
  13. 13. Develop Variations
  14. 14. What if... • Development expense overrun by 50%? • Unit cost overruns by 10% for 2 years? • Unit sales are overestimated by 10%? • Schedule is delayed by 6 months?
  15. 15. Convert to Decision Rules
  16. 16. Should we add an extra feature that will delay the project by 2 months?
  17. 17. Should we add a feature that will add $320k of value in exchange for delaying 2 months which will cost $1.4M?
  18. 18. Tips on Modeling
  19. 19. Accuracy is almost always controlled by the accuracy of the input data
  20. 20. Don’t bother with Net Present Value, Discounted Cash Flow, Internal Rate of Return, etc.
  21. 21. “If people do not understand a model, they are less likely to let it influence their behavior”
  22. 22. The Simpler Version
  23. 23. http://toolsforagile.com/blog/archives/647
  24. 24. http://agileconsulting.blogspot.com/2011/03/using-cost-of-delay-functions-to.html
  25. 25. 3 fundamental ideas • Quantify the cost of delay • Balance development speed against other objectives using decision rules • Ensure decision makers consistently use the decision rules
  26. 26. Discuss

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